Monthly Archives: November 2008

Last week’s Angel Co-Investment Summit, put together by the NACO, was one of the best investment forums in recent memory. Over 150 active Angel investors (yes, you read that number correctly) heard pitches from 25 companies who had already raised Angel funding.

48% were science or medical technology companies, 32% were Web and 12% were telecom based

72% were from Ontario, 16% from BC and the other 3 from Saskatchewan, New Brunswick and Newfoundland. Nothing from Quebec perhaps reflecting what little presence NACO has in Quebec.

The median amount companies had already raised was $1.15 million

The median burn rate was just below $40k/month

The median amount sought was $1 million

The median pre-money valuation was $5 million

Overall I was impressed by the quality of the companies, particularly the science and med tech companies who seemed to have great CEOs, unique IP, customer traction and relatively little capital burned. The Web companies in general did not hold up.

If this is what “early stage” investing looks like these days, those entrepreneurs raising seed capital are going to have to work twice as hard to get investors’ attention. In any case, I hope events like this encourage more deal syndication which would mean more capital available for companies.

Startups and drinking are both positive influences in my life so I never miss an opportunity to combine both. Heri at TechEntreprise has announced the next StartupDrinks Montreal which is happening next Wednesday (Nov 26) at Reservoir. It’s on Duluth just east of St. Laurent (head up to the second floor). Festivities start at 5:30pm though no one will judge you if you decide to start drinking earlier. You can always blame “the market”.

If you’re an entrepreneur or you’re thinking of becoming one, please register at TechEntrepreprise and come on out. Funders, students and service providers are also welcome. It’s exactly the kind of event I like: lite on presentations and heavy on networking.

I previously talked about how to vet ideas by putting them through a quick screening process. Another good technique is to take your idea and argue the opposite. Philosophers have done this for centuries so I didn’t just make this up. In a nutshell: assume your idea sucks and try to convince yourself it doesn’t.

The technique is simple: take each of your claims (e.g. “people will buy our product”) and argue the opposite (e.g. “people will absolutely NOT buy our product”). You’ll be forced to spend time thinking about your idea’s flaws, which no entrepreneur enjoys doing. If you aren’t skeptical by nature, find someone who is. They’re usually easy to spot because they annoy you.

Here are some examples:

“We are first to market”

The Believer: Even if I see a competitor I’ll convince myself that they aren’t in my space. I somehow found a huge untapped market that everyone else in the world overlooked.

The Skeptic: I know there are competitors (including people who aren’t competitors now but will be later) and I want to be aware of them. My customer’s desire not to switch to my product is a form of competition. I doubt that being first to market is the right strategy anyways.

“Our market is huge and growing”

The Believer: I can quote a Forrester report about the market being $X billion. I still talk about how worldwide Internet use is growing, fast.

The Skeptic: It doesn’t matter how huge the market is, I can’t afford to reach everyone in it. Big markets attract big scary competitors and crowded markets drive down prices and margins. This early in the game I probably have no clue how to size my market anyways.

“We have a real competitive advantage”

The Believer: Everything about my startup, from the cool name to the indentation of my CSS is a competitive advantage. My competitors have great stuff but it’s not integrated

The Skeptic: Our customers don’t care about our differentiators. Most things we consider competitive advantages are easy for others to duplicate (unless they don’t work).

Playing the skeptic is unnatural for all entrepreneurs, that’s why it’s such a useful exercise. Sometimes that idea you’re only pretending to think sucks will actually suck at the end of the exercise.

Hats off to Jevon, David, Jonas, Michele and the StartupNorth team for putting on StartupEmpire last week. Startups do not exist in a vacuum and a better community means better startups.

There’s not enough space to mention everyone who was there but it was nice to see early stage funders out in force (JLA, Growthworks, iNovia, MontrealStartup, Sigma). It was especially nice meeting the 10 entrepreneurs who won the StartupEmpire contest, sponsored by Austin Hill and Flow Ventures. The packed audience was full of entrepreneurs and there was a real buzz about the event that comes with having 300 people simultaneously give each other elevator pitches all day long. Truly inspiring.

There were 3 important takeaways from my perspective:

1. Just Do It – I was really pleased to see the focus of the event NOT be on fundraising. I don’t think we need another event teaching people how to pitch VCs. But we do need more events that help entrepreneurs take those crucial first steps in their ventures. Bootstrapping seemed to be the word du jour.

2. Idea vetting – The pitch panel, where entrepreneurs gave elevator pitches, was a great way for entrepreneurs to learn that there’s no substitute for harsh criticism when honing your pitch. Entrepreneurs are always pitching, to co-founders, customers, funders, and many don’t take the time to practice until it’s perfect.

3. Finding Co-Founders – Many entrepreneurs I spoke with are looking for co-founders. Some are developers looking for businesspeople with specific industry expertise. Others are experienced in a particular field but aren’t programmers. We have to come up with a better way to match co-founders together.

Next week we’ll be at the NACO Co-Investment Summit where there will be 20+ funded startups pitching an audience of Angels.

As entrepreneurs, we all have great ideas and we love turning them into reality. Unfortunately, most people spend more time justifying why their idea is great rather than questioning whether it is great. Here’s an example:

Have brilliant idea, e.g. Curling Rink Management Software

by Reverend Aviator (cc)

Daydream about becoming the Microsoft of curling

Write business plan about how you will dominate the curling software market

Convince poor souls to jump on board your curling startup

Do an investor road show to raise funds for MyCurlingERP.com

What’s wrong with this picture (besides thinking that curling is just plain wrong)? The problem is that there was never a rigorous process for vetting the idea. This is a missed opportunity because vetting can reveal hidden strengths and weaknesses in ideas.

I use the following quick screen process for evaluating ideas:

Are you an expert in the field? If you aren’t you’re probably overestimating your idea or underestimating the difficulty of executing it.

Does your idea make something 10 times better than the alternative? If your answer is “how am I supposed to measure that?” you’re in trouble already.

Do you understand how the industry makes money? Understanding how people give away things free is not the same thing.

Can you win? Being #17 in an industry sucks.

If you answered NO to all 4 questions it’s a good indication your idea needs major surgery. If you answered NO to some of the questions, it’s time to focus on improving its weaknesses.

photo by Divine Harvester (cc)

E.g. if you aren’t an expert in the field take the time to recruit one. Better yet, try to recruit the industry’s best expert. If your value proposition is a combination of ease of use + slightly cheaper + runs on a Mac + is multi-lingual, you’re probably proving your idea is only incrementally better. No one ever switched painkillers because of better taste and they won’t adopt your solution unless the thing they care about really works. Prove that and the UI can be ugly.

Don’t understand how your industry makes money? You probably won’t make any. Before inventing a new revenue model study the revenue models of your competitors and complementors. One tip: if no one is making money in an industry (e.g. curling software) it’s a good sign you won’t either. Finally, seeing a path from your idea to dominating some industry niche is very important. If there are insurmountable barriers to entry or high capital requirements to win, your idea may never get a chance to win. Think about this in advance.

The point of idea screening is not to generate ideas. That’s your job. Screening protects you from your natural tendency to believe that your ideas are great. If they are great, screening will help you prove it.